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Germany — The Home of Smart Innovation

BY CATHERINE BOLGAR

What do aspirin, the electron microscope, the MP3 music format, and Liquid Chrystal displays have in common?

They’re all German inventions. There are thousands of others, but many of them are so specialized that the general public will never hear about them — even though they touch the lives of millions, if not billions, of people. Simply file these under “German ingenuity.”

German companies know that price is not always the deciding factor in the customer’s mind. Germany’s reputation for engineering excellence and innovation means that consumers buying German goods are typically looking for that little bit extra: be it cutting-edge technology or that special, perfectly designed something that simply can’t be found elsewhere. For that reason, Germany’s companies — and particularly the Mittelstand of small and medium-sized enterprises that dominate the economy — are veritable innovators.

German innovation is “often based on very deep technical expertise, which allows even small German firms to become market leaders in very narrow segments,” says Christian Terwiesch, professor of operations and information management at the Wharton School of the University of Pennsylvania in Philadelphia. “These companies succeed by offering the best technology in their segment.”

According to “Competitive Alternatives: KPMG’s Guide to International Business Location 2010,” Germany is — alongside the Netherlands and Australia — an international leader in terms of science and technology industry share of the total work force. Germany, with Japan and the U.S., invests the greatest share of gross domestic product in research and development internationally.

Germany ranks eighth out of 139 countries for innovation in the World Economic Forum’s (WEF) “Global Competitiveness Report 2010-2011.” According to the WEF, Germany is the international leader in terms of capacity for innovation, occupies fourth place for company spending on R&D, and secures sixth spot for quality of scientific research institutions.

“We invest where the brains and the knowledge are,” says Martin Strobel, spokesman in Munich for Intel Corp., the Santa Clara, California, chip maker. Last May, Intel decided to invest €12 million ($15.2 million) over five years in the Intel Visual Computing Institute, located at Saarland University in Saarbrücken. And this June it opened a cooperative lab with the Jülich University research center; one of three locations in Germany that have very fast supercomputers. The investment sum wasn’t disclosed. “They really know what high-performance computing is about,” says Mr. Strobel. Intel also recently agreed to pay $1.4 billion for the wireless chip business of Infineon Technologies AG of Munich.

Germany has hundreds of research institutes, including internationally famous ones such as the Max Planck Society and the Fraunhofer Society, both based in Munich. “Max Planck is funding and conducting research in almost all fields in the natural and life sciences,” says Dr. Terwiesch of the Wharton School. “They have repeatedly won Nobel Prizes, and they have been very successful in knowledge transfer. They created the seeds of many innovations that have been commercialized.”

German companies file the third most Patent Cooperation Treaty patents (per million workers) in medium-high and medium-low-technology sectors (after Switzerland and Sweden), and in high-technology sectors they rank eighth, according to the Organization for Economic Cooperation and Development (OECD). Germany ranks third, after Japan and Sweden, for patents filed simultaneously with the U.S., Japanese and European Union trade offices.

Getting innovations off the drawing board and into the market — the realization of innovation — is one of Germany’s strengths. According to the innovation indicator of the Berlin-based German Institute for Economic Research (DIW), Germany is among the top five of 17 analyzed countries — including the U.S. and U.K. — for the development and marketing of high technology. “Scientists in Germany are highly efficient. No other countries under study, besides Sweden, have generated more economically viable new developments from a given R&D budget,” says senior DIW research associate Jens Schmidt-Ehmcke.

Germany is also very strong in implementation and networking in DIW’s innovation indicator, says Alexander Kritikos, vice president and head of innovation, manufacturing and service at DIW. German companies are very good at cooperating in networks — or so-called “clusters” — to innovate, improve technology or create new products. According to Mr. Kritikos, this is particularly true in the chemical, automotive industry, medical engineering, electrical equipment industry, and mechanical engineering sectors.

The biotechnology cluster in Munich, where one particularly rich research seam being sown is personalized medicine, is a case in point. Germany’s rigorous environmental regulations have also given birth to a number of innovations from renewable energy to emissions control and energy efficiency. German researchers are working to make coal a cleaner and more environmentally friendly fuel, as well as ways to capture carbon from heavy industries says Claudia Kemfert, head of energy, transportation and environment at DIW. The chemical industry is seeking substitutes for oil, while the automotive sector is exploring alternative fuels such as hydrogen and electricity.

Germany also actively encourages its researchers to network internationally. It has set up centers for research and innovation in countries such as Brazil, Russia, India, China, and the U.S.

“The BRIC nations and the U.S. and Canada are exciting partner countries for German players, both in academia and industry,” says Joann Halpern, director of the German Center for Research and Innovation in New York. “All of these countries are making significant investments in research and development, and Germany is also committed to long-term investment in R&D.”

The centers “were created to bring together international experts and researchers from academic institutions, industry and government, thereby enhancing communication on the critical challenges of the 21st century,” she says. “Innovation is enhanced by collaboration. We bring the greatest minds together and play a facilitator role.”

Both international researchers and foreign investors find a positive partner in Germany, Dr. Halpern says. “The collaboration between research and industry makes Germany attractive.”

The government also supports R&D with solid financial backing. Launched in 2006, the government’s “High-Tech Strategy” directs around €4 billion a year to R&D, including in the form of grants. The federal government spent a total of around €12 billion on R&D in 2009.

The main funding for R&D comes from the private sector. Businesses financed 68% of R&D expenditure in 2007, according to Eurostat, the EU’s statistical body. The German regions of Braunschweig and Stuttgart led the EU in R&D intensity or R&D expenditure as a percentage of GDP. Indeed, Germany had 11 regions among the top 25 for R&D intensity in 2006. As a whole, Germany has an R&D intensity level of 2.54%; putting it in the top 10 among developed countries, according to Eurostat.

One reason the government and private companies account for so much of R&D is that venture capital in Germany is fairly thin on the ground — a possible opportunity for foreign investors. Last year, Germany counted just 33 to 41 “business angels” per million inhabitants — compared with 850 in the U.S. — according to the Commission of Experts for Research and Innovation, a group that advises the German government.

Some high-tech start-ups have certainly had great success. SAP AG was started by five Germans in 1972, and today is one of the world’s biggest software companies, with almost 50,000 employees in 50 countries.

“The German model of industrial exports has been very supportive of innovation,” says Dr. Terwiesch of Wharton. “Innovation is a part of an export economy. It creates a feedback loop where strong exports benefit from innovation and innovation benefits from strong exports. They feed on each other. It helped Germany keep a strong industrial base even at times when it was a high-wage country.”